Jamie Dimon’s Moral Hazard

Jamie Dimon of JPMorganChase once was Barack Obama’s favorite banker, a big backer of the President’s 2008 campaign. But he’s been blowing hard and often when it turned out that Obama was attempting to–gasp!–regulate the banking industry after its wanton recklessness caused the stock market, and the economy, to crash. Dimon has gone on to attack Paul Volcker, a true voice of reason, for proposing ways to limit the activities of the big banks. And now, in a lovely little trick of fate, JPMorganChase has lost $2 billion in the very sort of proprietary casino gambling that led to the 2008 crash.

I’m happy that Dimon is getting a taste of comeuppance, but schadenfreude is hardly a sufficient reaction here. What if the loss had been larger? What if JPMorganChase were now teetering on the brink of failure? Well, we would have to bail it out, of course. The financial system simply could not handle the collapse of one of its six largest institutions of higher earning; the economy would once again crash. The term of art when a bank reaches the size where it is too big to fail is moral hazard. That means bankers will tend to act less responsibly if they know the government won’t allow them to go under, if there are no real risks in risk.

I’ve written before that Barack Obama let the bankers off the hook too easily. Jon Huntsman’s plan to force the six biggest banks to dismember themselves by imposing large fees according to size was a good idea that was ignored because Huntsman was ignored. And Obama’s problem is compounded by the fact that Dodd-Frank, the regulatory reform legislation passed last year, is a spotty proposition–some very good provisions attended by some very bad provisions (making small banks play by the same rules as the big banks, even though the 2008 crash wasn’t caused by small banks), and completed by a disastrously inept effort to limit the gambling abilities of the biggest banks.

Moral hazard may be the most important issue facing our economy in the long-term, but it’s not likely to be addressed in the coming presidential campaign. Obama had his chance to rectify it, and failed; Romney’s not interested in trying. And the Jamie Dimons of the world can preen and flash along…until their hubris causes the next disaster.